There is no other word for what the Democratic Party has just done to railworkers than betrayal. I am sorry, dear reader, if you don’t like to hear that.

I don’t think that’s how President Biden sees it. He’s a process guy, he got union leadership and the railroad companies to hash out a deal a couple of months ago, he thinks it’s fine and good. Historic even.

Only the rank and file did not agree. It was unacceptable to the unions representing a majority of railworkers. Biden seems to view this as workers reneging on his deal. That is bullshit. A deal is not a deal until the principal signs on the dotted line, not when some lawyer says it’s the best he could do. Sorry if you think it was your deal, Joe.

The deal was unacceptable not because railworkers are greedy. The “historic” raise in the tentative agreement will barely exceed inflation over the period of the contract. Railworkers are treading water on wages. The unreasonable commie militants seem just fine with that.

The dispute is over how railworkers are treated. Which, in a word, is like shit. For decades, the rail industry has been achieving “efficiencies” by in large part by dumping nonfinancial costs onto its workforce. It’s great when productivity increases because of some new invention: A construction firm buys a steam shovel, and becomes genuinely more efficient. It accomplishes the same work with fewer workers. But it’s a different thing entirely when the same firm buys a whip, and then is able to accomplish the same work with fewer workers by beating the crap out of those desperate enough to remain. Both get scored as “productivity increases” by statisticians, but the second one is a regressive transfer from workers to shareholders, not an actual efficiency. Railroads’ vaunted “precision-scheduled railroading” is the whip rather than the steam shovel. It puts ever fewer workers on ever longer trains, magnifying the responsibility and hazard each worker must bear. Railworkers are on call to be dragged from home for days or weeks 75% of their lives, and harshly penalized if life supervenes and they can’t show up. You try living that way.

The unions were asking for up to fourteen paid sick leave days, rather the one that the current deal provides. Fourteen was an opening bid. Had Congress actually done what Democrats only pretended they were trying to do, and included seven paid days in the Congressionally imposed deal, it would have been fine. Congress would have been taking away railworkers’ leverage to strike, but giving much of their very modest ask in compensation. Instead, Congress stole all of railworkers’ bargaining power and gave them nothing.

Pacino as Godfather offers Nothing.

Besides just how just plain wrong this is, Democrats are in real danger of repeating their 2016 hubris. Yes, no matter how many formerly Republican-ish affluent suburbanites Democrats pick up on abortion or concern about saving democracy — really important issues! — if the working class, the majority of our citizenry, continues to abandon the party, Democrats will lose, and they will deserve to. The party is riding high at the moment. Hey, they said inflation would kill us in the midterms, that our key issues weren’t “bread and butter”, but they were wrong! We did great (at least grading on a curve). But last month, Biden could still claim to be a pro-worker, pro-union President. Now, not so much. No matter how much historians tell us (grading on a curve!) he still might be the “most union-friendly President in history”, it becomes like Malcolm X and taking out the knife half way. The populist wing of the Republican Party — Marco Rubio, John Hawley, Ted Cruz — may never actually deliver the goods to workers, but for people who want to throw out the bums that just fucked them, the rhetoric (like Donald Trump’s before them) may offer just enough hope to win their votes.

All is not lost. As Steven Greenhouse and Harold Meyerson point out, President Biden can remedy this just by eliminating an exemption for railroads in an executive orders that already requires Federal contractors to offer workers seven days paid leave. Embedding social desiderata in Federal contracting requirements is a bad way to do policy. It imposes an “efficiency” wedge” from customers’ perspective between the private and public sector, discrediting government action. But in this case, with the railroad industry consolidated into joint duopolies that already behave extractively towards customers, little would be lost. Certainly there’s no reason this rapacious sector of our economy should be exempt from an obligation of Federal contractors in every other sector!

If you want to save democracy, or just do the right thing, let Joe Biden know. Railroads that wish to transact with the Federal government must meet the same obligations that bind every other industry. That means seven days of paid sick leave. Right this wrong, conspicuously.

Alternatively, freight rail is an essential utility that is not meaningfully regulated by competition. It is persistently extraordinarily profitable, and not a locus of technical innovation beyond shifting costs and risks to workers. Perhaps we should simply nationalize the industry.

Update: Here are my letters to Joe Biden and Marco Rubio on this issue.

Update History:

  • 2-Dec-2022, 9:45 a.m. EST: “…their the rhetoric (like Donald Trump’s before them) may offer just enough…”
  • 5-Dec-2022, 9:45 a.m. EST: “…a regressive transfer from workers to shareholders, not an actual a real efficiency gain.”
  • 5-Dec-2022, 12:10 a.m. EST: Added bold update with links to Biden and Rubio letters.

Some thoughts on Effective Altruism

I’m not going to get into the more contested parts of Effective Altruism, like whether AI safety is an urgent problem, or whether we should accept stronger-than-conventional views about animals’ moral weight.

There’s a hard core of Effective Altruism that has an obvious broad appeal. Nearly all of us agree that preventing malaria deaths and addressing severe poverty are good, important goals. But lots of people (like me!) find themselves really put off by Effective Altruism, even though we may know and respect people in the movement.

There’s a stereotyped conversation that goes something like this:

EA proponent: How can you not see that encouraging people to fund bed nets and so prevent unnecessary malaria deaths is a good thing? EA has saved thousands of lives, how can that not be good?

Person like me: Well, holding all else constant, that is good! I certainly don’t object to people buying bed nets to prevent malaria. But it also strikes me that buying bed nets doesn’t really get at the problems that render so many people vulnerable to malaria in the first place. We need a kind of systemic change that simple philanthropy can’t overcome.

EA proponent: Of course we do! We totally agree, and EA-aligned entities are interested in research towards effective development solutions. Obviously people have different views at a political level, but many EA-aligned individuals fund organizations that advocate for reform and better governance in both the developing and developed world, in order to pursue systemic change. We adopt a “both/and” approach! And surely it is better to help at the margin than not to help!

Yet I walk away still unconvinced. I’m trying to interrogate for myself why. It’s easy to argue that, under a better system, much of what the EA community does would make no sense. Essential goods like public health and basic succor should be ensured by states. In general, in a reasonably arranged society, philanthropy would finance civil society in spheres very local to donors, where they have better information and enjoy the kind of fine-grained feedback that states are ill-placed to perceive and react to. But if Give Well knows how to solve development problems, state actors are perfectly capable of allocating resources according to its recommendations. Philanthropists have no comparative advantage.

But we’ll all agree we don’t live in a better arranged society right now. So shouldn’t we divert resources to the places Give Well directs if our states are underdoing it?

In the dialog above, “person like me” used the mealy-mouthed phrase “holding all else constant”. If we were holding all else constant, the answer would be sure, of course. But I think the problem with Effective Altruism is that in social affairs you can hold nothing constant.

An obvious example is what was once one of Effective Altruism’s core recommendations (recently I think they’ve deemphasized it), “earn to give”. If it really is important to give, but a donor has her own requirements for a reasonable life, then she must increase her earnings some margin above that. If the need for charity is truly urgent, then of course a donor should earn as much as she possibly can, in order to give as much as she possibly can.

But earning large sums of money may not be neutral with respect to larger systemic questions that Effective Altruists generally concede are very important. There are ways of earning high incomes that are directly harmful, like hustling opiates or establishing monopolies. More broadly, industries that pay high incomes work to reinforce and sustain the status quo in which they thrive, rather than to evolve towards more egalitarian systems in which high incomes might be harder to come by, but philanthropic transfers would less necessary.

I think that the current emphasis in EA circles, perhaps as a response to this critique, is to focus on impactful careers rather than earning to give. But does that really address the issue? If, for example, you devote yourself sincerely to a great charity that does development work, and you allow yourself to be underpaid relative to what you might earn elsewhere, isn’t that laudable? At an individual level, it may be. But the crucial flaw in much EA-reasoning is that social outcomes are not arithmetic aggregations of individual-level scores. If you work for a development charity, the good work you do still depends on the high earners you forewent to become. Your work must be tailored to avoid approaches or choices that would upset the system that elevated them. Again, you are deeply tethered to the systemic status quo. If your organization is ambitious to increase its scale and thrive, it will likely be called upon to promote and reinforce questionable arrangements. Welcome to the World Economic Forum!

Indeed, from the perspective of “person like me”, philanthropy and the plutocracy that, in dollar-weighted terms, must dominate it is so interwoven with all that is systemically wrong, trying to do net good in the world via donor-financed institutions is likely to be counterproductive. The trade-offs are hard! I suspect GAVI, chartered by the Bill and Melinda Gates Foundation, has saved many lives relative to a counterfactual where everything is the same as it is now except Gates never intervened. But Gates is famously supportive of an extremely strong and universal intellectual property regime that, from the perspective of “person like me”, helps condemn the developing world to dependence and poverty (and continued disease), that contributes to class stratification in the developed world, that could be replaced by better means of encouraging innovation. (During the COVID crisis, GAVI was notionally supportive of waiving intellectual property restrictions, but in practice the organization was understandably circumspect.)

If I am to restrict myself to “evidence-based” behavior, then surely it is a good idea to donate to, or even work for, GAVI! The evidence that it has done good things is real. But we can only gather evidence about circumstances very near to the status quo. Since we can’t run persuasive social science experiments about a world in which many variables would be different from the one we actually inhabit, “evidence-based” policy is a prescription for local optimization, fine-tuning. If we agree that the key source of the problems we wish to address are systemic, but we can also make clear marginal improvements to those problems at cost of supporting institutions that help reinforce the bad status quo, how does a good rationalist weigh the trade-off? You may be suckered in the way that a certain narrow economism tells you it’s irrational to vote. At an individual level, your vote almost certainly won’t make a difference, but it will certainly cost something in time and convenience. Similarly, your withholding contributions won’t lead to a new intellectual property regime or alternative forms of state action, while your contribution to GAVI really will do a bit of good at the margin. But that sort of individual-level rationality doesn’t compose to social outcomes. You should in fact vote. It might be wise to circumvent donor-financed philanthropy as a key element of an ultimately harmful constellation of institutions, rather than contribute to it, despite the real good it also does.

At an individual level, that’s a genuinely hard judgment call. But Effective Altruism is a social movement, not a collection of independent idiosyncratic choices. At a social level, to “people like me”, it is not so hard. A social movement should not reinforce reliance upon plutocratic finance. It should not encourage or help whitewash extractive wealth generation. It should not prod people into careers where they must adopt the perspectives of those who most benefit from systems that we seem to agree must fundamentally change. At an individual level, the tradeoff between the costs and benefits of voting may not seem clear, but it would be obviously dumb for an interest group to advise its own members not to vote. Effective Altruism is a movement of idealistic, unusually educated, often affluent and socially influential individuals. Is integration of this group into the philanthropic status quo a good choice?

Note that fundamentally, the problem here isn’t philanthropy. It’s discretionary donor finance. The same critiques apply to think tanks, activist collectives, publications, research organizations, and Congressmen. In theory they ought not apply to venture capital, as allocation should be based on objective valuation of prospects rather than investor discretion. In practice, though, valuation of startups is so dependent on contestable assumptions that the industry is best conceived as donor finance plus a lottery ticket. If you think plutocracy is an important component of our systemic problems, then working through institutional forms where relative advantage will be decided by plutocratic discretion seems less than ideal. Plutocratic money is fine. It’s as green (much greener) than anyone else’s. But it must be decoupled from the discretion.

I love Effective Altruists. They are people devoted to thinking carefully and clearly and creatively, and serving the greater good. But as a social movement, I think they’ve erred. They’ve succumbed to fallacies of composition on both the input and the output side. On the input side, they imagine total contribution can be measured as a sum of individual contributions, so it’s sufficient to ask people to maximize their own impact, holding the rest of the world constant. That’s partial equilibrium thinking, and mistaken in their domain. On the output side, well, the usual critiques of “aggregate utility” as a welfare measure apply. I’d love to see a larger menagerie of social welfare functions, as formalizations that try to approximate competing groups’ actual values (which we might compare, contrast, perhaps even average), or that capture our status quo revealed preference as a society. Summing putatively identical concave individual welfare functions is great for expressing egalitarianism as a social value, and it usefully captures individual risk aversion. But it doesn’t actually express our collective aspirations.

There is no “true” or “scientific” social welfare function. We have to make it up. There is no objective way to quantify how much good we are doing in the world. And even if we settle upon some measure that we acknowledge merely expresses our own particular values, we will find that our means are not separable from our ends. I think many Effective Altruists have not fully grappled with contradictions between the means that they adopt and the ends they hope to further.

Postscript 1: For the most part this essay has been critique. I try here at interfluidity to be constructive. If EA is getting it wrong, how should people, including the well-meaning very rich, actually work to do good? I’ll write more on this in a future post, soon, I hope! Also, I have presumed more than argued that plutocratically dominated, donor-financed philanthropy is important contributor to what is undesirable about the status quo. For now I’ll send you to Anand Giridharadas and Rob Reich, but maybe I’ll try to offer my own summary of the case. If I’m going to be constructive, it might help to first clarify the pitfalls to avoid. Kelsey Piper offers a measured take on billionaire philanthropy, but I perceive harms that she doesn’t discuss.

Postscript 2: I’ve been percolating this for a while, but it’s probably not coincidence that I’m getting around to it now, in the wake of the astonishing collapse of FTX, the crypto exchange led by Effective Altruist Sam Bankman-Fried. My original take was that FTX died like highly leveraged financial institutions that also take on risk for profit often die, so it would be unfair blame the shiny new thing for an old, common story. It turns out the FTX’s case is extraordinary even within its sordid genre, and a case can be made that SBF’s really immoderate utilitarianism contributed to it. Even if that is so, I don’t think SBF is representative of Effective Altruism, and it strikes me as cheap to blame the broader movement for SBF’s sins.

Disclosures: In the above (and here again!) I have nepotistically linked my brother-in-law’s book. I am an uncompensated board member and officer of a small, donor-financed nonprofit.

Update History:

  • 16-Nov-2022, 8:10 p.m. EST: “…philanthropy and the plutocracy that, in dollar-weighted terms, must dominate it is are so interwoven…”; “…at cost of supporting institutions that help reinforce a the bad status quo…”

Real inflation cycle theory

Noah Smith has a good post on what, from a certain perspective, is kind of a puzzle. Why do real wages usually decline during inflations?

In theory, some economists imagine, inflation should be neutral. The nominal price level is just an arbitrary unit. If tomorrow we redenominated cents as dollars, and passed a law that updated previously defined contracts and prices to the new unit and let people exchange old currency for new, we’d expect nothing much to change. Sure, in “dollar terms”, prices would have risen by 100 times! But so also would have wages, and bank account balances, and everything else, so who cares. If we think of the real economy as fundamental and inflation as just a slipping of the nominal price unit, we’d expect wages and prices to rise simultaneously. Absent formal redenomination, there are some rigidities. Unexpected inflation redistributes from creditors to debtors, as debt contracts made in nominal dollars fail to adjust. But as Smith points out, wages are not thought to be rigid (“sticky”) upwards. So why, in most durable inflations, don’t wages rise at the same pace as prices?

This is a puzzle if you think about inflation as basically arbitrary, a symptom of mismanagement by central banks of purely nominal units. But that’s entirely the wrong way to think about stubborn inflations. Demand mismanagement can lead to some inflation, but it’s rarely durable. When there are not fundamental reasons for the inflation, moderate monetary and fiscal tightening quickly ends it. That happens a fair amount. Team transitory wins.

Stubborn inflations occur when there are in fact deep reasons why the inflation, or else some alternative form of unpleasantness, is necessary. Generally, inflation is the answer to a question: What do we do if we are not as rich as we thought we would be? More precisely, what do we do when the expectations of the labor force, in real terms, cannot be satisfied by the output we are capable of producing? Then we have to cut real wages relative to prior expectations somehow. If the shortfall is large, given the reality of downward nominal wage rigidity, we must resort to some mix of inflation and unemployment.

Inflation bounces around. We have lots of little spikes, the central bank and the fisc fine-tune, over time wages usually do keep up with prices through all of it. But when we have a serious inflation, it almost always accompanies a mismatch between what the labor force expects and what the economy, on the “supply side”, is capable of delivering. The functions of serious inflations are to (1) reprice real wages downward; and (2) allow for redistributions within the labor force, via repricings of relative wages that downward nominal wage rigidities would otherwise prevent.

Until February of this year, team transitory was right. In 2022, the fiscal impulse of the COVID era was going to collapse as quickly as it had arisen (and it has). That, and some monetary tightening, and unsnarling some temporary supply-side SNAFUs, would have ended the inflation. Last winter, we were seeing some redistribution of real wages within the labor force (towards the lower end), but not a steep decline in real wages. Then shit happened. February and early Spring brought three big shocks: the Ukraine War, the impact of Omicron on COVID-Zero China, and, in response to the Ukraine War, accelerating mistrust and hostility between China and the West. As Wolfgang Munchau points out (ht E.E. Reed), the old factory we have relied upon is shutting down. Over the next few years, we may have to radically reorganize the global supply side. The global demand side will have to adjust, at best, to a pause in the growth we might have expected from iterative improvements to that once humming machine. More likely we will have to adjust to some impoverishment in real terms, as businesses try to build a new machine from parts of the old one while the old one is struggles to sputter on. Patterns of sustainable specialization and trade that we have long depended upon are likely to be, well, no longer sustainable.

Globally, real wage expectations are out of kilter with what the global supply-side will be able to deliver. Locally, there will be winners and losers from the changes, which will entail redistribution of real wages from prior patterns within the global labor force. We are enduring a global inflation now because we require one. We don’t like it, so we are countering it with fiscal and monetary tools. But those can’t restore real wages the economy is unable to deliver. What fiscal and monetary tightening will do is trade some of the inflation for unemployment. Instead of everyone’s real wages falling, if we destroy demand for some superfluities, we can cut some of the labor force out from a share of the impaired flow of core goods and services that the global machine is now able to produce. That leaves more for the rest of us, higher real wages. As long as the supply side of the economy is impaired, our choice is whether to share the burden more broadly (tolerate inflation) or concentrate it on subgroups of workers (accept unemployment).

We are likely to do a bit of both, and oscillate between the two, until expectations of the labor force are realigned with expected (and much less uncertainly expected) global output. We won’t solve our macroeconomic problem until we find patterns of specialization and trade that are, in this new era, actually sustainable, and then accommodate our expectations and arrangements (wages, rents, etc.) to the actual production those new patterns can manage. Our problems are real. Neither Jay Powell nor Janet Yellen can fix them. Governments can, by finding a durable peace and building politically sustainable foundations for international trade and migration (which, I think, will be quite different from the arrangements of the past few decades), or by spurring domestic production of core goods and services.

Besides wage earners, there is another group of claimants who can share the burden of the real product shortfall. People who receive capital income might also adjust their real consumption. Under inflation they do, to a degree. Inflation will cause people “on fixed incomes” to consume less, and that will “help” in the sense that their discomfort will contribute to the burden sharing. Crashing portfolio values, declining home equity, higher mortgage payments (for those not on 30-year fixed rate mortgages) will reduce expenditures of the global “upper middle class”, helping limit the inflation and the decline of real wages. But in dollar terms, the vast majority of capital income goes to the very wealthiest, who did not spend much of it in good times, but who won’t adjust their spending downward in bad times, absent near total collapse of their wealth. Perhaps the main privilege of being fabulously rich is, under almost all circumstances, you get to opt out of “adjusting”.

At a macro level, the problem with capital isn’t that firms raise prices to pad margins. Those funds get paid mostly to people whose spending is decoupled from their earnings, so who don’t put pressure on global production. The expanded profits are like a tax, directly inflationary but disinflationary going forward as wage earners will afford less and less. The problem is when capital has the ability to increase profit by raising prices, that displaces the alternative strategy of increasing profit by expanding production. Expanding production is the happiest way of addressing a shortfall of core goods and services relative labor force expectations, and reduces the need for inflation and unemployment. In economic (as opposed to political) terms, the problem with capital is not that it takes too much money, but that it takes all that money while delivering too few goods. Which is why antitrust, or, excess margins taxes, or public options, should be at the very top of our inflation reduction agenda.

Update History:

  • 7-Nov-2022, 4:10 p.m. EST: “Patterns of sustainable specialization and trade that we have long relied depended upon are likely to be, well, no longer sustainable.” [eliminate repetitive use of “relied upon”]
  • 7-Nov-2022, 7:15 p.m. EST: “We don’t like it, so we will are countering it with fiscal and monetary tools.”; “Crashing portfolio values, declining home values equity, higher mortgage payments…”
  • 9-Nov-2022, 11:00 a.m. EST: “Under inflation they do, to a degree. There are people whose marginal consumption is affected by capital income or wealth effects.

Immigration, exploitation, and social democracy

A simple, amoral, model of an immigrant is a pair of hands attached to a mouth. From the selfish, amoral, perspective of incumbents, in aggregate, immigration is desirable if the value produced by the pair of hands is greater than the value eaten by the mouth.

However, as always in social affairs, the phrase “in aggregate” is home to many devils. From the perspective of many incumbents, immigrants are undesirable not because they are lazy scroungers, but precisely because their hands are willing to work so hard relative to what their mouths are fed. Exploitable, exploited, immigrants compete with domestic workers, and threaten labor bargaining power writ large. Exploiting immigrants domestically then comes to parallel exploiting comparative advantage internationally (where, of course, comparative advantage often means exploitable labor in foreign lands). It creates a bigger (domestic) pie “in aggregate”, but creates winners and losers. In a political system that enfranchises the potential losers, especially one with lots of veto points, exploitative immigration that would be valuable in aggregate may be blocked.

This can be understood as a kind of coordination problem among incumbents. If the winners from exploitative immigration would compensate the losers for their loss of bargaining power and so income, then all incumbents could be made better off. But institutionally, what kind of mechanism could be made to do that? Well, suppose we tax the increment of real income that employers gain from both exploiting new immigrants and hiring native workers on more favorable terms, and use the resulting revenues to fund benefits for the poor? No, that wouldn’t do it. Domestic full-time workers, even under somewhat less favorable terms than they might have faced without immigration, are unlikely to qualify under the society’s definition of “poor”. Households anchored by such workers define the bulk of the public. In relative terms they are typical, median. So a state that redistributes from the richest to the poorest won’t solve the coordination problem that prevents incumbents in aggregate from seeking to exploit new immigrants. A “liberal welfare state” isn’t enough.

Suppose instead we tax the increment of real income that employers gain from both exploiting new immigrants and hiring domestic workers on more favorable terms, and use the resulting revenues to fund universal benefits? These do reach, and so can compensate, the incumbent workers whose bargaining power has been reduced by exploitative immigration. States that redistribute into universal benefits, rather than help for the poorest, we describe as social-democratic.

Often social democracy and immigration are thought to be in tension with one another. The assumed basis for the tension, however, is that social democratic benefits will enable immigrants’ mouths will eat more than their hands produce. When immigration and immigration policy are framed in humanitarian terms, and if immigrants are provided social democratic benefits immediately and on the same terms as incumbent citizens, then yes, there are tensions between social democracy and immigration.

But if immigration and immigration policy are framed in selfish terms, then soft, pink social democracy becomes a hard-nosed solution to the coordination problem that prevents enrichment of incumbents by exploitative immigration. The mistake made by actual social democracies, with respect to immigration, hasn’t been their openness to it. On the contrary, it’s been their passivity, allowing mass immigration to be defined in reaction to humanitarian crises elsewhere rather than designing voluntary pathways for large numbers of people to migrate under terms that support rather than undermine the social democratic benefits enjoyed by incumbents.

What might these pathways look like? First, in order to minimize their effect on incumbent worker bargaining power and so discontent, immigrant workers might be employed in domains that are distinct from the occupations of incumbents, “they only do the work that we don’t want to.” Then, in oversimplified, completely amoral and antisocial terms, you might imagine a permanent, growing corps of guest workers, who come voluntarily to be employed on openly exploitative terms, because despite the exploitation they still earn more when employed productively in developed countries than they would earn at home.

We do see this kind of policy, in Middle Eastern countries especially. However, wiser polities will not craft policy in completely amoral and antisocial terms. Antisocial policy might make a polity wealthier temporarily but also weaken it, increasing the costs (economic and social) of maintaining domestic security and cohesion, while creating reputational and diplomatic vulnerabilities. Social democracies in particular flatter themselves as solidaristic and virtuous polities. Policy that undermines that often self-fulfilling self-perception should be scored as very costly.

So a canny social democracy will craft institutions of gradual integration. New immigrants would begin highly exploited in sectors of the labor market segmented from incumbent workers, but over time the exploitation and segmentation they face would decline. Second generation immigrants, or those who migrate as children, would be integrated as fully and quickly as possible. Incomplete integration and continued exploitation of second generation immigrants is a source of social instability and often a security concern, as unlike first generation immigrants, second generation immigrants have not chosen their status and have no lived experience of opportunity or escape, gratitude for which might compensate for the fact of exploitation.

Slow integration out of segmented, exploitative labor markets into the more comfortable mainstream is a tried and true formula for value extraction by immigrant-accepting nations. It’s been the formula the United States has used, when it has best succeeded as a “nation of immigrants”. Interestingly, it is also a formula urban China has stumbled into, accepting internal migrants from rural areas on exploitative terms, but working increasingly to integrate their children. Usually this strategy is tacit rather than open. In the United States, some categories of legal immigrants have full rights, but nevertheless wield limited bargaining power due to language barriers and various forms of ghettoization. Some categories of legal immigrants (seasonal workers, H-1B visa holders bound to a sponsoring employer) face formal restrictions that limit their bargaining power and constrain the domains in which they work. Illegal immigrants, of course, lack nearly all legal protection and so work under extremely exploitative terms.

It would be better for all concerned if de facto policies of exploitative immigration were formalized and their terms rendered explicit. So long as immigration into developed countries is perceived by incumbents as costly and altruistic, the large fraction of such countries’ populations that struggles to afford the costs they face already will oppose it. While the terms of exploitation-until-slow-integration remain tacit and denied, societies will be needlessly riven by conflict between justice-oriented activists, who will point to the exploitation and proclaim it illegitimate, and business interests whose capacity to benefit from exploitation drives the opportunity to immigrate in the first place. Developed country populations should understand how accepting and in fact competing for immigrants is in our direct material interest. With segmented labor markets and social democratic benefits, that “our” can include the whole incumbent population. Immigration is what makes universal health care affordable, one might point out, if inexpensive nurses’ assistants are drawn from the new arrivals. Migrant construction workers let us build social housing. Immigrants should understand in advance the exploitation they will encounter, but also its duration and limits. If the terms of both temporary exploitation and eventual full integration are explicit, they become a basis for competition among destination countries to attract migrants. New immigrants might start off enjoying somewhat threadbare public benefits, but graduate into full citizenship with full benefits over an agreed period of time. A path to full citizenship is essential on social grounds, for societies that do not wish to become divided into oppressively sustained permanent castes.

Under this policy regime, developed countries come to compete over the rate of exploitative immigration they can attract and tolerate. Since the surplus from exploitation declines over time with each cohort of immigrants, sustaining the surplus requires continual new entrants. Different countries’ social capacity to accommodate or integrate immigrants will always be a limiting factor, and quite legitimately. But countries that find ways to ramp up their capacity to continually accept immigrants with minimal social or cultural disruption would benefit, directly and visibly, from doing so.

We began with a simple, amoral model of an immigrant, a pair of hands attached to a mouth, and a very economistic view of a polity as an aggregation of people seeking material value. We might add to our model of an immigrant a soul. An immigrant is not a mere object that produces surplus or costs, but a subject whose welfare we care about and whose fellowship we enjoy. Our polities are not mere aggregates of selfish people but also nations, groups that seek to thrive together and forge a common future. Accepting immigrants in ways that materially strengthen our polities is good for both the humans that join us and the nations that we constitute together. Obviously we can get it wrong. If we are too exploitative, or fail at our promise to integrate over time and (especially) generations, we can harm both migrants and the fabric of our societies. If we are too generous, or if we fail to distribute widely the surplus that immigrants generate, accepting newcomers may not be politically sustainable, and rather than integration we may end up with interethnic recrimination. But between those two hazards lies huge potential opportunity, for migrants, their children, and for the societies capable of accepting and, only temporarily, exploiting them.

Update History:

  • 30-Dec-2023, 4:20 p.m. EST: “but over time the exploitation and segmentation they face”

Peace as war by other means

I remain adamantly in favor of ending the war in Ukraine now. I also adamantly favor Ukraine in the war. Despite apologetics from various quarters, Russia is straightforwardly the aggressor. A just settlement would repel the Russian Federation entirely from Ukraine’s internationally recognized borders, including Crimea. Russia plainly is not going to agree to a peace under which it slinks away from the territories it has just flamboyantly claimed to annex, let alone from Crimea, which it claims to have annexed in 2014. So how can I reconcile my continuing call for peace now with a just outcome for Ukraine (and the world)?

Let’s start with a commonplace. War is a profoundly negative-sum game. It kills and destroys. Whatever might be contested between the parties, if there were a form of adjudication that would yield the same distributional outcome as prosecuting the war, but without all the destruction, that would be strictly better for all parties. Of course, in real life, we never know what the outcome of warfare will be. When we think we know how a war is going to go, we often find ourselves catastrophically surprised. War is unpredictable. It compels an adversarialism so determined, our models are confounded. The contours of rationality itself curve like space at the edge of the event horizon.

We do not have some magic form of single combat guaranteed to yield the same outcome the war would have yielded, except without the mess. Alas. However, what we sometimes do have is a party with an upper hand. When one party in a conflict seems to have the upper hand, an extrapolatory expectation, unreliable and oversimplistic in fact, becomes nevertheless psychologically compelling. Party A has momentum! With determination, grit, time, and attrition, surely, say Party A partisans, we will win completely! Party B, during these times, is demoralized. Party B partisans cannot openly accede to extrapolatory logic. Instead, they must constantly work to persuade their publics, and their soldiers, that a corner is about to be turned. Somehow this darkest hour can portend a brilliant dawn. It’s hard work, for Party B propagandists. It often doesn’t work very well as, day by day, territory and lives are lost, national symbols are desecrated. Party B struggles to resist the gravitational pull of a joint consensus, the die is cast, we will lose, Party A will rout us.

It is during times like these that Party A has an opportunity, not to impose a victory but to propose a new, less terrible, form of conflict. From Party B’s perspective, this is a lifeline. We were losing the war, now here’s an alternative game, maybe this one we can win, at least maybe we will have a better shot. But of course this alternative proposed by Party A must be one Party A believes they are capable of winning. As long as Party A is pretty sure, they lose little in terms of the final outcome by shifting from war to this less destructive form of conflict. But they gain a great deal, because there will be much less destroyed when they eventually do win.

So the opportunity for peace here is not to propose a final settlement, or some precarious armistice that might, like the one that “ended” the Korean War, suppress hostilities cross-fingers indefinitely. The opportunity is to propose a new form of conflict, an alternative to and replacement of the war, by which the same issues can be adjudicated.

At the moment, in the current conflict, it is Ukraine that is Party A. Ukraine is the party that is winning and so can hope that some alternative game they propose will be accepted. So it’s Ukraine that could propose this sort of “peace”. But what would it look like?

I think it could be very simple. First, Ukraine and the West have a for-this-moment redline that Russia should not have gained by force any territory relative to the February 24, 2022 status quo ante. Russia has a for-this-moment redline that Crimea will not be surrendered. So, for this moment, we should revert to the February 24 status quo.

Russia claims that, by virtue of referenda, a merger into the Russian Federation of Crimea, Kherson, Zaporizhzhia, Donetsk, and Luhansk is legitimate. The first point to make is that even if those referenda were free, fair, and expressive of the “will of the people” (which, whatever that means, they were not), secession is not any people or geography’s unilateral right. Secession, like divorce, implicates long-standing commitments and investments by the broader nation-state, not just the prerogatives of the local population. Referenda may be a part of a secession process, but they are never sufficient to force one. Ultimately reorganization of national borders must be mutually agreed by all of the parties to it. A nation-state’s obligation is to uphold the rights of all of its citizens, in every geography and of every ethnicity. A nation-state has no obligation to accede to secession, although it may choose to agree to part ways with a territory under mutually negotiated terms.

I think that Ukraine, Russia, and these territories should negotiate something like the following terms: For a period of ten years, administration of the contested territories will be according to the February 24 status quo ante. Crimea and the portion of the Donbas then controlled by separatists will be administered by Russia. The rest of the disputed territory will be administered by Ukraine. Citizens of all of the territories shall have the right of dual citizenship. They can obtain Ukrainian passports, Russian passports, or both.

At the end of the ten-year period, the UN will supervise referenda as to the final status of the territories. As part of the settlement, Ukraine and Russia agree upon how that will work for each territory under either result. If Crimea chooses Russia, under what terms does Ukraine supply the peninsula with water?, for example. It might be prudent to merge Crimea and Kherson into a single territory for the purpose of the eventual referendum, in order to foreclose the possibility of a discontiguous Ukrainian Crimea, which would be provocatively vulnerable.

The war over territories and populaces then reverts to a war between the parties for hearts, minds, and bellies over a period of a decade. If Ukraine, with help from the West, is redeveloping into a new Poland or Czech Republic while Russia stagnates, then the territories, including Crimea, will likely choose to be a part of Ukraine. Russia, if it wants to actually win the territories it claims are its own, will have to compete with the quality of its own development, or else make its taunts of cultural superiority to the decadent West extraordinarily compelling to the publics it would rule. The terms of the conflict would now be positive sum. As with the war, eventually some party will win and some party will lose each of the territories. Whatever the outcome, it won’t be fully just from the perspective of parties who have mutually irreconcilable conceptions of justice. But the fight to win the territories will render the territories themselves and the countries that mean to host them better off, rather than catastrophically worse off. The parties will have to compete in their effectiveness at doing good, rather than doing evil, and either side might win.

Security arrangements will have to be negotiated, so that a party losing the fight for hearts and minds is not tempted to reneg in favor of what they perceive to be an easy military workaround. Ukraine will not be demilitarized. Ukraine will require reparations, given the destruction that Russia has wrought on its territories. Fortunately, there are hundreds of billions of dollars of Russian assets already seized by the West, already lost to Russia indefinitely absent a settlement. It should not be too hard to persuade Russia that surrendering these now hypothetical assets to Ukraine as reparations would be in its interest, if that will purchase an end to this war that is bleeding them and help restore tolerable relations with its most important historic trading partners.

The competition for territories between Ukraine and Russia will not have ended. Indeed, it will have just begun. This peace would not be the end of the Ukraine war, but rather its continuation by other, much better, means. It would only be the end of the killing.

Update History:

  • 15-Oct-2022, 2:20 p.m. EDT: “It would only be the end of the killings killing.”

Liberalism vs democracy

It’s a habit, almost a tic, for many of us to put liberalism and democracy together. We live, or like to think we live, in a “liberal democracy”. This combination has seemed so natural that Francis Fukuyama famously argued it might be “the end of history”, the telos towards which human affairs are inevitably drawn. In our current politics, it is people who think of ourselves as liberals in a broad sense of the term who feel like democracy is under attack by a motley mix of populists, reactionaries, post-liberals, integralists, and fascists. We are the democrats. They are threats to democracy.

Within the vanguard of that they, there are intellectuals and leaders who gleefully accept that role. Everything they say we are we are and we are very proud of ourselves. The neoreactionaries are overt monarchists. It is the law that must teach the public, rather than the other way around, according to “common good constitutionalists”. Right-wing pseudohistoricists proclaim “We are a republic not a democracy.” Peter Thiel, who bankrolls so much of this stuff, declared democracy and freedom incompatible, and that he was for freedom, as early as 2009.

This colorful troupe of outcasts and intellectuals would matter very little but for the fact that much of the public votes for political candidates enthralled by their ideas. But the vast majority of these voters — let’s call them the Trumpists — are not overtly antidemocratic. On the contrary. Trump doesn’t proclaim, as some of those intellectuals might, that democracy is a feeble system that should be discarded so that our betters can rise to the service of rule. Trump appeals to his supporters in the name of democracy. The election was stolen! The voice of the people was muzzled by the ventriloquism of a shady and, yes, liberal elite.

Many Americans, I think, perceive liberals as the enemies of democracy, and quite plausibly, because liberalism can yield plainly antidemocratic outcomes! Who voted for shutting down the mills and factories of the midwest and sending that work to China? I didn’t. Did you?

Liberalism, or at least the version of liberalism to which we’ve subjected ourselves over the last few decades, stands in real tension with democracy. In both economic and social affairs, it valorizes and places above interference by the demos certain freedoms that have profound effects beyond the individuals who consent and choose. The state could not pick winners and losers, with respect to the location of industry. That was for business leaders and shareholders to decide. Then they were the winners, and the rest of us losers. The state should not impose parochial norms over gender identity, and now the most basic stuff we used to take for granted — this is the Ladies’ Room, this is the Men’s Room, you are either he or she — is overthrown. Nothing makes sense and the governor says they are mutilating our kids. “If you like what you have you can keep it” is the claim liberals always make, you do you but let other people make very different choices. Fine, you said. It’s a free country! But we are not in fact atoms, we live in a society. The domain of privacy that liberalism constructs is artificial and always leaky. It is not neutral. Some freedoms are assiduously protected, while others must give way. It turns out you can’t actually keep what you had, you never can, even though you liked it. The bathrooms are changing. Aspects of humanity so fundamental they are embedded in the very structure of language are obsolete and offensive. Now you must learn new language or be relegated a bigot, by your own children even, whose schools (that your tax dollars paid for) have assimilated them into this brave new world you do not recognize and cannot navigate. That seems weird, ugly, just plain wrong. What happened to your freedom? Your choice? Your rights? Did some majority actually vote for this? No they did not, as far as you can tell.

The issue, to be very clear, isn’t that there is anything wrong with trans rights. It’s that what begin as private rights claims under liberalism carry social implications that create wedges between outcomes and democratic preferences. This divergence becomes especially acute subnationally, within communities upon whom the rights claims themselves are imposed in the name of universality rather than embraced democratically. Illiberal political entrepreneurs will predictably polemicize these ruptures between democratic choice and outcome, rather than work to manage and reconcile them.

Liberals say they — we — are the democrats, on procedural grounds. Yes, we had the elections and wanted everybody to vote. But we constructed a system that took much of what the demos might care about out of reach. Vote for whom you like, it’s a free country! But whomever a majority chooses, government has no right or capacity to deliver the society that a majority actually wants. In both the economic and social sphere, every liberalism (many are possible) carves out particular, critical domains and makes them exempt from deference to the public. Liberalism emasculates democracy even while it sanctimoniously attends to the bureaucracy of it. Should this really count as democracy, or just a fig leaf for its opposite? The system is rigged. Perhaps Viktor Orban’s “illiberal democracy” is the more natural conjunction after all, and “liberal democracy” an oxymoron?

I don’t think so. I am still a strong enthusiast of liberal democracy, and would argue that “illiberal democracy” in practice collapses to ugly autocracy. But we have to continually work to reconcile these ideas, liberal and democracy. They are not mutually reinforcing. Quite the contrary. Respecting and celebrating individual choice while also tethering broad outcomes to the interests and (evolving) values of the demos is, I think, achievable. But it is not automatic or preordained. We have to be clever, and much more careful than we have been, if we hope to mitigate and manage the contradictions. Who knew that preserving the end of history would demand from us so much agility?

But if we don’t do this work, much of the public will perceive liberals to be the real threat to democracy. And they won’t be entirely wrong.

Update History:

  • 9-Oct-2022, 11:55 a.m. EDT: “But whomever a majority chooses, government has no right or capacity to deliver the society that a majority actually wants.” [comma inserted]
  • 11-Oct-2022, 11:20 a.m. EDT: “…what begin as private rights claims under liberalism carry broad and powerful social implications that create wedges…” [too wordy (ha!)]

What is not separable from how

Like most of what I write (when it is not satire), this should be an obvious point. Nevertheless. In social affairs, what should be done cannot be separated from how we choose to do it. A policy that would succeed and be widely lauded if chosen in one manner might crash and burn if chosen in a different way. This is a problem for technocracy, for the notion that academics and think-tankers can work out the best policy, persuade politicians via white papers and working groups to implement it, then watch the public enjoy virtuous outcomes. Even when (much more rarely than proponents claim) research is good and reliable, social affairs just do not work this way.

For identifiable policy choices that are high-stakes in terms of values or outcomes, it’s pretty obvious why this approach often fails. It is a old joke in politics that whatever choice you make will be wrong. After the fact, the sun will set, the sun will rise, and stuff will happen. Humans being humans, the good stuff will seem normal, what ought to happen, what might have happened anyway, who knows?. The bad stuff will seem like something somebody did wrong and should be held accountable for. And your political opponents will be driving that home and blaming you for the choice.

There will be corruption. There is no human enterprise of significant scale in which people do not or do not appear to sometimes place self-interest above the broader mission to which they are ostensibly engaged. This is as true in the private sector as in the public. But in the private sector people are supposed to be pursuing their self-interest. “Agency problems” are ubiquitous, and understood to be a cost of doing business. If excessive, they reflect error by management or shareholders who should have arranged incentives more cleverly or built a more cohesive culture. However, in the public sector, the same behavior is corruption, sin, contagion. Even a drop potentially rots the foundations of our institutions. Every public enterprise is corrupt, while private enterprises are just well or poorly managed.

Identifiable, consequential policy choices must be resilient to the likelihood that salient bad outcomes will be linked, in good faith or bad, to the policy, while positive effects will be vigorously contested. Absent either strong ideological “buy in” from the mass public or concrete, material benefits to a politically influential constituency, opponents will often succeed at undoing or undermining the policy, however successful your honest research suggests the nascent outcomes to be. Of course opponents will have their own disingenuous research. In the public mind and most history books, your policy will have failed.

Durable policy requires either populism ex ante or payoff ex post (or effective use of institutions like a judiciary that can remove issues from political contestation, for better and for worse).

Among liberals and technocrats “populism” has become a bad word, a synonym for a kind of vicious, collective id that demagogues like Donald Trump destructively conjure. (Thomas Frank usefully demurs.) It's much better to understand that populations are subject to systematic passions. Models that treat human groupings as mere aggregates of agents with isolated preferences and interests are badly incomplete. We must design institutions that productively accommodate what we might bloodlessly call correlation. Markets civilize greed, marriage civilizes lust. Democratic institutions are supposed to civilize populism.

Marriage is not a chastity belt, and markets do not demand vows of poverty. It is not enough to blunt or “check” the passions of the masses, as the US Senate is ostensibly designed to do. Good democratic institutions encourage a productive populism, give it effect through intelligent action then succeed in part because of the legitimacy and durability and adaptability enabled by the public’s enthusiasm. There must be traction, some channel of transmission, between public passions and the actions of governing institutions (state and parastatal). And vice versa! “Burn it all down" populism results from a loss of this traction, from a sense that governing institutions are alien, imposed, that rather than mechanisms of cautious transmission there are bales of insulation thrust between public passions and political outcomes.

Governance is a whole-of-society enterprise. It’s not enough for the metaphorical head to be smart. (That the metaphorical head tries so often to outsmart its own metaphorical body suggests that it is not really very smart at all.) Policy choices that will succeed when there is legitimacy—a sense of collective agency, widespread “buy-in”—will not when there is not. Under the institutions of contemporary liberal democracy, it is political parties and their coalitional choices that reify and render legible the passions of the public, that bind those passions to choices by government, and also reshape them as a consequence of their choices. It’s symptomatic of a failure of our institutions that more than 40% of Americans have no political party to which they are willing to make the (bidirectional!) link of identification. And no, a “none of the above” party will not solve this problem.

Technocrats do the best they can and we are where we are. Sure, we’d be better off with a multiparty democracy designed to engender four-to-six medium-tent parties. That’s not the country we live in. But your research is so promising! If it’s true that salient, controversial policy choices are unlikely to be durable without popular passion or ex post payoffs, maybe the way to go is the "submerged state”? Kludgeocracy may not be so bad after all?

You can take heart, I suppose, in my defense above of the public sector from unfair double standards surrounding “corruption”. But in a kludgeocracy you’d at least expect a lot of mismanagement. Looking at the existing submerged state, there do seem to be patterns of stakeholder payoffs that might not accord well with most of of our understandings of the mission of the state. Last year, liberals invested a lot of hope in “secret congress” (which, unfortunately, did not refer to the sort of thing that needs to be civilized by marriage). In this moment's fallen world, when you want to get some particular smart thing done, quiet may indeed be the way to go.

But there is an accountability problem. We’ve been doing the submerged state a lot, and it’s brought us to the crisis of democracy that we're in. In aggregate our skein of tax expenditures form a misshapen blob from which the broad public feels excluded and alienated, but each one was somebody's idea of smart policy. The best lobbyists have a talent for persuading themselves that the interests of their employers and those of the public are happily aligned. If only the public could be made to understand. Of course you are different.

There is no alternative to an effective state, which both makes good choices and makes them via institutions that recruit broad legitimacy for those choices, within which members of the public feel a sense of collective agency.

If you are about getting policy right, good on you. (Really!) But it isn’t enough. We need a better state.

Effective Life Loving

Suppose that you Love Life, but you live in a world where a mysterious Hunter is felling the beasts. This saddens you. You Love Life. So you embark on a program of Effective Life Loving, and try to work out interventions that would Maximize Life as Efficiently as possible with the resources you personally have at your disposal.

There is, you realize, a sad opportunity in all of those corpses the mysterious Hunter generates. Corpses themselves can be the source of much Life! You are smart, creative. You have a scientific background. You realize that if you were to genetically engineer certain flies and fungi you could dramatically improve the efficiency with which old life—those dead beasts—are converted to new. You toil in your laboratory, and the improvement in production of biomass over time is dramatic and satisfyingly measurable. You devote yourself to collecting corpses left behind by the Hunter, wandering far and wide, so that you can site them and seed them to maximize production of new Life. You encourage other smart, creative people—most of whom also Love Life!—to join your project. Many don’t, but some do, and you take some satisfaction in this secondary Effectiveness you can attribute to your efforts. You are well and truly an Effective Life Lover.

A thought, an irritation of the mind, fails to gnaw at you. Wouldnt it be much better, you mercifully fail to think, if the Mystery of the Hunter could be solved, so that rather than seeding new Life on the corpses, Life could just continue without so much need of heroic remedy? Yes. But here is the world. It is what it is. Rationality—it has somehow seeped from graduate economics programs into your very bones—consists of optimizing subject to constraints. The Hunter hunts. You optimize subject to that constraint. You cannot be accused of having caused the Hunter. But as you earn accolades, in your own mind, among the community of Life Lovers you have fostered, does it trouble you that your Success—no no you are much too modest to be successful, it was important that you grow rich to build the laboratories you needed of course but this isn't about you this is about Life—nevertheless does it trouble you that your entire project is framed by the existence of the Hunter? That if the Hunter somehow were stopped, that your work would become obsolete, superfluous, worthless? Are you and the Hunter in some sense collaborators?

No, of course you don’t think these things, because these things are absurd! You didn’t make the Hunter. You would be delighted—sincerely, absolutely delighted—if somehow the Hunter could be tamed. It’s a big, diverse world! Let solving the mystery of the Hunter, reigning them in, be the project of other people. You wouldn’t know where to start. You could not weigh biomass to measure progress. How would you know whether your approach to Life Loving was even Effective? No, that is a project for other people. You—but not just you, also the people you’ve persuaded, and they have made themselves quite unusually rich and well resourced because of course they must be well resourced to be Effective—will work on maximizing biomass in this world as it is.

It occurs to you that the Hunter must be pretty rich too, to do what he does. Perhaps you or some of your peers know them? Perhaps they are somehow among you?

No. Preposterous. You are Lovers of Life.

And of course, though it will not be your thing, you will do what you can to help other people tame the Hunter. Your thing, of course, is rigor. Although you shied away from making Hunter hunting your thing, precisely because it could not be rigorously pursued, you can contribute to others’ work by calling out ways in which the approaches they are taking cannot be rigorously supported and so might fail to be Effective. They will be grateful for the critique, as your faculties of critcism are perspicacious and capable. Well, they would be grateful, if only they were rational and data-driven and open-minded like we are. If it is true that nothing they are pursuing can withstand the rigors of rigor, why should they be so prickly about it? If their lack of rigor, relative to the presence of ours, causes resources to flow disproportionately in our direction, isn’t that only Rational? Give well, right?

Some of them even accuse us of protecting the Hunter. They succumb to weird conspiracy theories that we are the Hunter! What sane person would devote resources to people like that?

Our biomass grows and grows. It may not be as pretty as the beasts who were killed. It is a shame the beasts were killed. But we are restoring a great deal of biomass.

Update History:

  • 16-Aug-2022, 11:55 a.m. EDT: “…you live in a world where a mysterious Hunter is shoouting felling the beasts.”
  • 16-Aug-2022, 12:05 p.m. EDT: “no no you are much to too modest to be successful”
  • 16-Aug-2022, 4:50 p.m. EDT: “they would be grateful, if only they like you were rational and data-driven and open-minded like we are.”; “…consists of optimizaton optimizing subject to constraints…”

When to tax excess margins

Comments at interfluidity are always great, and the previous post was no exception. I want to quickly address some critiques by commenters, and make clear something that was perhaps not so clear in the prior post:

As commenter Effem points out, taxing margins in the way I’ve proposed is similar to imposing a price control, except that it won’t leave goods priced into shortage (as long as the tax above the price threshold is not 100%). The simplest way to understand it is as an exercise of government-coordinated monopsony power to counter the monopoly power that enables firms to profit from imposing scarcity and raising prices. It’s only an appropriate remedy in this case.

Commenter Somebody offers the very straightforward argument that high prices contribute to supply by bringing higher-priced production on line, which taxing price rises should discourage. If a commodity is being competitively produced such that lower cost sources are fully exploited, preventing price rises would indeed impair supply. But if lower cost sources are not being exploited because an oligopoly industry prefers to profit from scarcity instead, it’s more efficient to eliminate the oligopoly rents and get the cheap production online then to hope price rises bring new entrants into more resource-intensive forms of production. To use the commenter’s example, we don’t want to tap Canadian tar oil sands while cheaper sources of oil remain available but unexploited by producer choice. If industry incumbents are intentionally limiting supply, letting prices rise would only bring out this supply if it would provoke competition by new entrants somehow immune to the barriers preventing exploitation of the more accessible sources.

What if, however, a commodity may occasionally be able to command very high margins, but over a full cycle, its price is very volatile and often below average cost? Then clipping high margins may render the commodity entirely uneconomical to exploit. This is Effem’s concern. One way to deal with this is to let the industry consolidate during downturns, and then let it extract oligopoly rents, so that good times cover the bad. But that is not a great approach. It distributes costs unpredictably, and an industry monopolistic enough to make this work may not confine itself to pricing in a normal rate of profit over the full cycle. Another way to manage this is to incentivize storage when the commodity is cheap that can be mobilized when the commodity is dear to blunt the cycle. Futures markets are supposed to do this to a degree: “spiky” commodities tend to go into backwardization, representing a negative cost of storage net of a convenience yield. But obviously futures markets and the storage they incentivize have not been sufficient to prevent destabilizing swings in the price of oil. For really important commodities, state interventions like the Strategic Petroleum Reserve should probably be expanded. But storage can only be a buffer, sufficiently sharp volatility will break it. And there are services that cannot be stored also subject to high fixed costs and feast/famine cycles, like airlines. These industries are always a regulatory challenge: If you manage to create textbook levels of competition, price falls to marginal cost, which in ordinary times with flush capacity means price does not cover average cost, and everybody goes bankrupt. If you let the industry consolidate into pricing power, it grows predatory, and uses prior cycles’ bankruptcies to launder progressively higher scarcity rents. Laissez-faire simply does not work for industries like this. The solution, broadly, is to subsidize these industries through famine, while clipping the potential scarcity rents in good times by, e.g. taxing unusual margins. We just subsidized the airlines in famine. Now, they seem to be enjoying scarcity rents, and are not overly urgent about expanding capacity. We need to routinize a full-cycle theory that serves the broad public, rather than our current practice under which industries panic us into bailouts during rough patches, then enjoy scarcity rents during recoveries.

On Twitter, @InquisitiveUrsa suggests using a price collar around forward commitments to encourage petroleum supply. The state could promise to purchase very large quantities of crude to refill and expand the strategic petroleum, promising to pay at least, say, $80 per barrel but requiring a commitment to sell for no more than say $100 per barrel from domestic suppliers. This is a great example of a full-cycle stabilization approach, rather than a half-cycle panicked subsidy or ad hoc price intervention. (I would prefer pairing the committed price floor with an excess margins tax, to eliminate a screw-the-government-we’ll-take-our-scarcity-rents revolt by industry.)

Commenter Brett worries that taxing excess margins would be bad for innovation. There are a bunch of cases to think about there. Innovation can yield high margins in three ways: (1) A market is broadly competitive, but a first-mover enjoys temporary pricing power during the lag time between the introduction of the innovation and when competitors are able to efficiently reproduce it; (2) A market is intentionally uncompetitive because we have used patent, copyright, or other so-called “intellectual property rights” to grant an innovator the capacity to price at high margins; and (3) no formal intellectual property right protects an innovator but network effects or some other barrier to competition vouchsafes persistent pricing power to one or a few key players. Case (1) is the least problematic. High margins won on new products for which there are no obvious barriers to competition should be celebrated, and certainly not taxed. As time passes, competition should discernibly come to reign in prices and margins. If that does not happen, we may eventually consider it an example of case (3). But we should give the innovator the benefit of the doubt for some time. With respect to case (2), as Dean Baker has pointed out, we are already talking about taxes. Intellectual property rights amount to a grant to private parties to use the coercive power of the state in order to receive what are effectively excise taxes on particular goods and services that otherwise would be provided more cheaply. This is intended as a reward to innovation, though I think that intellectual property rentiers have expanded it into an overly costly and poorly targeted incentive to innovate. Rather than layering a new tax on persistent excess margins derived from a thicket of IP rights and an army of lawyers, perhaps it would be better just to pare back the IP rights and let competition compress the margins. But in our fallen world, perhaps restructuring and optimizing legal arrangements rabidly defended by powerful interests just won’t happen. In which case, taxing persistent excess margins might be a good backstop, letting innovators fully enjoy their intended monopoly for a some period, but creating hazard for those who don’t let up over the long terms intellectual property lobbyists and lawyers are now able to extend exclusivity. Under case (3), where network effects or some other intractable barrier prevents competition over a long term regardless of our collective choice to reward or not to reward the innovator, one way or another of course we should reign in the pricing power and excess margin. That may involve taxing it, or regulating more directly to ensure “natural monopolies” are managed in the public interest. The permanent winner-take-all network effects that have let Facebook, Google, Amazon, and Apple so thoroughly dominate have been terrible, not good, for innovation.

Longtime commenter benign brodwicz argues excess profits should be transferred to firm workers, rather than taxed. The Whitehouse / Warren proposal would have the tax dividended to individuals, which I think is a fine idea (though a hard sell in an inflationary moment, and unfortunately with a phase-out by income). I don’t think transferring scarcity rents to firm workers is a great idea. The transfers would partially substitute for salary, and the result would be worker interests more strongly aligned with shareholders’ to pursue and exploit monopoly.

Taxing persistent excess margins is in the same family as antitrust regulation. It’s a regulatory idea that in application has to be tailored to the particulars of an industry. In some industries, competition works fine, high margins are transient rewards to innovation until competitors catch up, and nothing should be done. But much of our economy is now concentrated or captured by conglomerations of various sorts who squeeze. It is time to squeeze back. Fundamentally, what we want is a regulatory regime that discourages firms and investors from aspiring to monopoly or tacit cartel. We want firms to understand that even if they achieve persistent monopoly rents, they won’t be able to keep them. Just as it is in the interest of the New York Yankees that their league be regulated so not even they can permanently dominate, we want firms in industries to work proactively with regulators to ensure continuing competition. They should understand the alternative will not be a lucrative stagnation but real risk of expropriation.

Update History:

  • 8-Jun-2023, 5:15 p.m. EEST: “and users uses prior cycles’ bankruptcy bankruptcies to launder progressively higher scarcity rents”; “Rather than layering a new tax on persistent excess margins”

Tax excess margins

With prices of commodities like oil soaring, there have been calls for a so-called “windfall-profits tax” from people like Sheldon Whitehouse and Elizabeth Warren. Matt Yglesias brings up the usual objection: If prices are soaring, it’s because producers aren’t producing enough to satisfy demand. Further taxing profits, the story goes, would only blunt incentives to produce, and so would be counterproductive. Yglesias suggests imposing a tax designed to be “inframarginal”, that would tax profits at levels beneath those producers are pretty sure to generate, but leave higher levels of profit untouched to preserve incentives to produce. I agree with Josh Barro that for a variety of reasons, this proposal is “too clever by half”. It would be hard to get right, especially considering how the precedent it sets would be perceived over a longer timeframe.

Nevertheless, it is good that Yglesias moves beyond the neoliberal reflex to assume taxes must always reduce incentives to produce. In theory, a reliably inframarginal tax wouldn’t affect those incentives at all. But we can do even better than that! We can design a profit tax that actually improves incentives to produce!

Holding the cost of goods sold constant, firms have two broad strategies to increase profits: They can increase the quantity of goods that they sell, or they can increase the price. Shareholders may be pleased either way, but the rest of us have a preference for the first strategy. We would like firms to seek profits by increasing production at moderate prices, rather than imposing scarcity and charging high prices. If markets were subject to textbook competition, firms could never choose the second strategy. One firm’s scarce production at high prices would become other firms’ opportunity to expand quantity and market share. But in concentrated industries, or say, an industry dominated by an international cartel and a few large producers, firms may tacitly coordinate to choose the second strategy. Call it “capital discipline”.

When competition does not prevent firms from resorting to scarcity and pricing power, a tax can. The key is not to tax profits per se, but profit margins. Then firms are free to be as profitable as they want to be, if they increase the quantity they produce and sell at customary margins. But if they try to shirk producing and just raise prices, the gravy gets taken away.

You wouldn’t want to tax accounting-derived profit margins. Firms would just raise prices anyway, and find ways to pad costs to keep margins low. But for commodities like oil, we know how expensive oil has to be for even high-cost producers, like US-based frackers, to turn a decent profit on each barrel of oil sold. So all we have to do to penalize the scarcity strategy is tax revenue collected at a fair margin above that price. Suppose the all-in cost to frackers per barrel produced is $80/barrel. We simply impose a tax on revenue above $100/barrel. Once the price of oil rises to this level, it does no good for producers if the price jumps even higher, to $120 or $140. The state takes the extra $20 or $40 away. The only way, then, to increase profits is to sell more barrels, or produce them more efficiently. And that is the incentive structure we want. Rather than blunting incentives to produce, taxing excess margin restores the incentives that, in a textbook economy, competition would provide. The same approach could be applied to refiners’ “crack spreads”. (See David Dayen.)

Not all of our politicians are idiots. If you read the details of the Whitehouse/Warren proposal, it is structured largely this way. It would tax 50% of the difference between current prices and prices known to be profitable for producers during an earlier period. It’s designed to hold producers harmless, if they increase quantities, but reduce the benefit they receive from a higher price. It even exempts smaller producers, to encourage competition to do the work and obviate the tax.

There’s no reason to get too clever by half. Sure, as you’d expect from Elizabeth Warren, a so-called “windfall-profit tax” (that is really an excess margins tax) has a populist stick-it-to-the-price-gougers vibe. But it is also a well designed levy from a technocratic perspective that would enhance incentives to produce when competition is insufficient to discourage industries from seeking scarcity rents. If such taxes are imposed regularly, the threat of them would reduce the incentives for industries to consolidate in the first place. Taxing persistent excess margins is in the sweet spot where good politics and good policy intersect. We should do more of it.

Update: See also “When to tax excess margins” for more, and for responses to common criticisms of this proposal.

Postscript regarding climate change: I am terrified of climate change. It feels perverse to be writing about fossil fuels as an ordinary commodity whose quantity of production at lowest possible cost we should seek to maximize. Over as short a term as possible, we would like fossil fuels not to be produced at all, to be left in the ground. But I broadly agree with Matt Yglesias that, as a practical, political matter, kneecapping supply is a bad approach to this end. The material pain that unusually high energy prices produce, unless mitigated by some sweetener (like a carbon dividend), provokes backlash that undermines political coalitions serious about climate. High fossil fuel prices not due to an overt tax make the people who work to sabotage climate solutions richer and more powerful. These political circumstances may change, perhaps very soon unfortunately, as each summer is deadlier and more frightening than the last. But for the moment, high fossil fuel prices provoke political reaction more effectively than they promote desirable efficiencies. As long as this remains true, the key to weaning ourselves must be to render fossil fuels expensive relative to carbon-neutral alternatives, rather than in absolute terms. That is, we need to drive down the perceived cost of substituting efficiencies or alternative energy sources so that reduced use of fossil fuels is not painful. This is a political rather than ethical claim. From an ethical perspective, we ought to be willing to tolerate large standard-of-living sacrifices (and the redistributions that would be necessary not to starve people) in order to preserve a habitable planet. Politically, however, we are not there yet, so we must invent spoonfuls of sugar to help the medicine go down.

Update History:

  • 15-Oct-2022, 2:35 p.m. EDT: Add bold update about followup post.